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Traditional costing

Example 5

Limco is considering changing its selling price using one of the following
techniques:

 Using a 20% mark-up on absorption cost

 Using a 30% mark-up on marginal cost

 Obtaining a price that will provide a 15% target return on investment. The
product is expected to require a $2m investment in the year.

Determine the expected selling price under each of these methods.

Solution

Using a mark-up on absorption cost

Selling price = Full cost per unit × (1 + mark-up percentage)

= $35 × (1.20)

= $42

Using a mark-up on marginal cost

Selling price = Marginal cost per unit × (1 + mark-up percentage)

= $25 × (1.40)

= $32.50

Using a target return

Target return = $2m × 15% = $300,000

Per unit = $300,000/20,000 units = $15 per unit

Selling price = Full cost per unit + target return

= $35 + $15 = $50

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